You've heard the scary statistics: About two thirds of Americans will need long-term care. The average annual cost of a private room in a nursing home is getting close to $100,000; the length of stay can run three years or more.
Do a few quick calculations, and it's easy to get very worried about the potential financial impact on your retirement plan. But recent research is shedding new light on the risks. The key finding: The odds of needing nursing-home care may be higher than previously thought, but the length of needed care is shorter. The new data has experts talking about the implications for revamping our current approach to insuring against the risk of high long-term care expenses.
A recent study by the Center for Retirement Research at Boston College (CRR) found that 44 percent of men and 58 percent of women will need care - somewhat higher than some previous estimates. But the average duration of a nursing-home stay is 0.88 years for men and 1.44 years for women. CRR's research also concludes that no more than 50 percent of men and 39 percent of women who use nursing-home care stay longer than three months.
"It's a big event for some people, not for others," says Anna Rappaport, an expert on long-term care who heads an actuarial consulting firm that bears her name.
That raises an interesting question about just how much nursing-home care is being paid for by Medicare. The program isn't designed to cover long-term care, but it does cover up to 100 days of skilled nursing care following a hospitalization. The data on this question is inconclusive, but "it seems likely that many of these short stays are covered by Medicare," states the CRR study.
Long-term care still should be regarded as a significant retirement risk. A recent report by the Employee Benefit Research Institute (EBRI) attempts to quantify the potential impact of a major LTC cost on retirement success by comparing projected retirement-savings shortfalls for different bands of longevity, and by calculating the projected outcomes with and without long-term care needs. Ignoring nursing-home and home health-care costs decreased the shortfall projections by an average of 74 percent.
"The comparisons show how important it is to include long-term care costs in these calculations," says Jack VanDerhei, EBRI's research director.
The risk is tied closely to longevity. Twenty-one percent of men and women age 80 to 84 have at least a mild or moderate disability, compared with just 7 percent of those aged 70 to 74, according to CRR.
The latest LTC utilization data comes at a time when insurance industry and policy experts are debating ways to improve the safety net for long-term care risk. The current system is a hodgepodge. Just 13 percent of households purchase commercial long-term care policies, according to the University of Michigan's Health and Retirement Study; everyone else who needs nursing-home care is covered by Medicaid or self-insured.
The commercial long-term care insurance (LTCI) market has been experiencing upheaval over the past several years. Many underwriters have stopped issuing new policies due to an inability to develop sustainable, profitable LTCI business, and many policy experts view long-term care as one of the most important unsolved pieces of the nation's health-care puzzle.
One financial planner who follows LTCI closely, Michael Kitces, recently proposed to reform LTCI to cover only high-impact, low-probability events. He proposed that the industry begin offering two- or three-year deductibles instead of the three-month that is typical now. That would bring premiums down dramatically, permitting policyholders to use the significant premium savings that result to cover their care during the elimination period (the amount of time you wait for benefits to begin after filing a claim). But that would require changed thinking in the industry, Kitces acknowledges - and also by states, which regulate insurance. Most states require LTCI elimination periods of no more than 365 days by law.
"Everyone fears these ultra long nursing-home events, but they are not the norm and don't happen as long as we think or thought they do," Kitces said. "The stays tend to be a shorter event or series of shorter events bouncing in and out of care - and once people go into a nursing home, they don't stay there very long."
Double-digit rate hikes on many older LTCI policies in recent years have been especially unnerving to policyholders. Insurance companies must go to state insurance regulators, and the requests often are eye-popping, running as high as 60 percent and rarely less than 20 percent. The final increases negotiated with regulators usually run in the 20 percent range.
Rate hikes don't have to be a disaster for policyholders. If you are hit by one, don't panic or drop your coverage. If you've had your LTCI for a while, the premium almost certainly is much lower than what you'd pay on a new policy at an older age - even after a steep rate hike. What's more, the risk that new coverage would be denied due to a medical condition rises with age.
One way to cope with a large premium increase is to reduce the benefit, for example, by cutting back the daily benefit amount or increasing the elimination period. Another option is to cut the length of time that benefits are paid.
Kitces thinks LTCI premiums are stabilizing, mainly because the sharp increases in initial policy prices insulate buyers against the risk of rate shock down the road. Indeed, new policy prices for traditional LTCI have continued to rise; average prices jumped 8.6 percent last year, according to the American Association for Long-Term Care Insurance.
Mark Miller is a journalist and author who focuses on retirement and aging. He is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living." Mark also edits and publishes RetirementRevised.com.
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